By John De Goey, CFP
Special to the Financial Independence Hub
One thing that I notice both in the media and in speaking with other advisors is the dual presumption that passive investment products are made for Do-It-Yourself (DIY) investors and that active ones are made for people who work with advisors.
To hear some people tell it, it’s as if those who are using mutual funds have to have an advisor and those using ETFs are always DIYers.
In fact, there are two separate decisions at play here. The two mutually exclusive decisions are:
Should I use an advisor or be a DIY investor?
Should I use stocks, actively managed mutual funds or passive products like ETFs or index funds?
Technically, neither of these two decisions are absolute, since people can (for instance) hire advisors, but keep a small portion as “play money” for themselves, too. Similarly, investors could use any number of securities or investment products in combination, so they don’t have to be entirely active or passive.
Core & Satellite as compromise?
Indeed, many people advocate a ‘core and satellite’ approach to investing. At any rate, since the two decisions are independent of one another, it should be obvious that there are, in fact, four possible combinations. In addition to the presumptive pairings mentioned above, two other possible options are being a DIY investor using active management and hiring an advisor, then investing using passive products.
This begs the question of which of the four combinations is best. There is no single, definitive best answer. My own view is that since it is highly improbable that anyone will reliably outperform markets through security selection over statistically significant timeframes, the decision about active and passive approaches is a simple one. People should choose passive.
Obviously, it’s a free country and people can do what they want, but research the world over shows how incredibly difficult it is to beat benchmarks through traditional active management.
The second decision is highly circumstantial and therefore much more difficult to handicap. For those with the time, training and (mostly) temperament to manage their own portfolios, doing so is a viable option.
For those who are even a little bit emotional and/or unaware of basic portfolio management or financial planning concepts, hiring an advisor might be a very good investment.
Investor, know thyself
The problem is in determining whether you really need an advisor or not. My understanding is that about one quarter of investors work using a DIY format. That strikes me as being about right and I think most people are pretty good at self-diagnosis.
Stated a bit differently, if you think you might need an advisor, you probably do and if you think you’d do a decent job going it alone, you could probably do that, too. The big question for investors is one of self-assessment: How well do you know yourself?
John J. De Goey, CFP, CIM, FELLOW OF FPSC is a Vice President and Portfolio Manager at BBSL. The views expressed may not be shared by BBSL. Email: firstname.lastname@example.org.